Malcolm Maiden

Wondering why Transurban comfortably raised $2.7 billion from shareholders for its 62.5 per cent equity share of the $7 billion Queensland Motorways acquisition in May? Check out the toll road group’s result for the year to June. Transurban is accelerating as smoothly as a Tesla.

It boosted revenue by 12.6 per cent in the June year, and lifted earnings before interest payments, tax and depreciation and amortisation (EBITDA) by 12.8 per cent to $934 million.

Operating cash flow jumped by 27 per cent to $521 million, and free cash flow was 29 per cent higher at $571.9 million. The group has boosted its annual payout in steady steps from 22¢ a share in 2008-09 to 35¢, and says it will pay 39¢ or $594 million in 2014-15.

Distributions are tied to free cash flow. They slightly exceeded it this year, but chief executive Scott Charlton says next year’s payout will be 100 per cent covered. It is that sort of predictability that allows Transurban to pay huge prices for toll roads (including 27.5 times EBITDA for Queensland Motorways in May), and sell equity to investors at similar multiples to finance the deals.

The key is not so much what Transurban is earning and distributing to investors now, but what it will collect and pay out out over the next decade or two. There will be more cars like Elon Musk’s Tesla passing under Transurban tolling gantries in years to come, but Transurban’s cash flow and distributions are set to keep rising.

The group is a better earner than it might have been. In a deal with the Victorian Labor government in 2006, it redeemed concession notes valued at $2.9 billion for just $550 million in return for taking on the task of upgrading Melbourne’s M1 expressway where it passes the CBD.

The notes were created when Transurban won the right to build Melbourne’s CityLink toll road, which opened in 2000, and they obliged the group to make annual payments to the government of either $96 million or 30 per cent of distributable cash flows from CityLink, whichever was the lower.

The notes ran until 2034, and CityLink is by far Transurban’s biggest business, generating 59 per cent of its revenue and 63 per cent of its $759 million EBITDA in 2013-14. Transurban bought the notes out cheaply. With the annual concession note payment extinguished, its earnings are (and are going to continue to be) higher than they might have been.

Even without that gift, Transurban is an extraordinary business. Freed of the concession note obligation ,CityLink is keeping 90.3 per cent of its revenue as EBITDA. Its portfolio of Sydney tollways generate EBITDA margins between 66.5 per cent and 94.9 per cent.

Transurban issued shares at $6.75 and $6.95 to raise $2.7 billion in May. Its shares were down slightly in a soft market yesterday but closed at $7.58, well up on the issue prices. They are an obvious option for retirement share portfolios.

RATES ON HOLD

Reserve Bank governor Glenn Stevens said a month ago that the Reserve wouldn't blind side the markets with a cash rate rise.

Long before any thought was given to an increase in rates, it would "probably be sensible for the board to cease references to a future ‘period of stability’," he told an audience in Hobart.

The Reserve's latest decision to hold the cash rate at 2.5 per cent and the announcement that accompanies it shows that the softening-up period he referred to has not arrived.

The Reserve's statement announcing that rates are on hold - as they have been for a year - is very similar to the one it issued after its meeting a month ago.

Most importantly, the following statement is repeated:

"In the board's judgment, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to be a period of stability in interest rates."

On Stevens' Hobart formulation, that means that a rate increase is not on the horizon.

The Reserve isn't on hold because the economy is in a sweet spot.

It says again, for example, that consumer demand is only growing moderately, that resources sector investment is beginning to decline significantly, and that signs of improved private sector investment "remain tentative as firms wait for more evidence of improved conditions before committing to significant expansion".

In other words, the central bank is keeping interest rates on hold because the handover from the resources investment boom to the rest of the economy is still not definitely confirmed.

Until it either is or it isn't, the direction of rates remains uncertain.